Downstream Intercompany Merchandise Transactions Sketchy Shoes is a subsidiary of Pa

cific Brands. Pacific routinely sells merchandise to Sketchy at a 25% markup on cost. Information on

intercompany merchandise transactions is below (in thousands)

Inventory balance on Sketchys books, purchased from Pacific Brands, January 1, 2020. . . . . . $ 6,250

Inventory balance on Sketchys books, purchased from Pacific Brands, December 31, 2020. . . 6,625

Total sales revenue recorded by Pacific Brands on merchandise sales to Sketchy in 2020. . . . . 250,000

Required

a. Prepare the working paper eliminating entries related to these intercompany transactions at Decem

ber 31, 2020.

b. Assume Sketchy sold merchandise acquired from Pacific Brands for $300,000 during 2020. What

amounts appear on the separate books of Pacific Brands and Sketchy Shoes, relating to the inter

company merchandise transactions, for sales revenue and cost of goods sold? What are consolidated

sales and cost of goods sold? Show how the eliminating entries in part a above adjust the balances

reported on the separate books of the two entities to the correct consolidated balances.